18 October 2008 9:55 PM

Warren Buffett invests... phew

What a relief - Warren Buffett, the greatest investor of our time, has clearly signalled his backing for buying shares now. Writing in the the New York Times yesterday he said he's shifted his own 'personal' portfolio from government bonds into US shares. He's soon to be 100% invested and reminds us again that the market's lowest point nearly always comes before the good news starts to flow. And we're certainly still up to our eyeballs in gloom.

As I said on this blog on Monday, I invested the money I had one the sidelines, inspired by Buffett's old greedy-fearful mantra ringing in my ears. What a delight to see him follow up days later by saying that rule of thumb most definitely applies right now.

I'm not convinced the US is the most promising place to invest (here are my concerns on the US, UK and other developed economies and why I prefer Latin America and Japan) but who am I to start arguing with the Sage of Omaha.

Here is his full letter below - and don't miss the fascinating analysis from readers on the New York Times.

"The financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities."

Comments

Instead of taking cheap shots at a guy who has proved he knows what he's talking about actually READ what Mr Buffet wrote.
He does not know where the market will go over the next year but he is sure that it will be higher in 10-20 years time and stocks will out perform cash over that timescale.
Trouble is people are greedy and want big returns every year hence the annual performance table for funds etc.
If you are going to need your money within the next 10 years you shouldn't buy shares (usual advice is to have at least 6 months outgoings in cash - let's face it, jobs are not secure these days).
Mr Buffet invests in 'real' companies, that is companies that make or do something rather than those that might have had a good idea that might come to something some day.
You are welcome to take a flyer on a dotcom startup but make sure you can afford to lose the money :)

Warren does seem to be offering some very sound advice, whether you like it morally or not makes very little difference. In fact, it would be fair to say that the whole gloomy outlook on the world economy was created by the greedy traders in the first instance. If Warren sees a way to capitalise on that, then that's fine. After all, this is a Capital system that encourages greed at whatever cost. You sound rather like a sore loser there John... maybe follow some of his advice, instead of getting your knickers in a twist!

He has so much money that he can choose whatvever he wants, and more importantly whenever he wants "money is the king in a collapse of markets".

Waiting until millions loose their investments, funds and pensions is not rocket science.

His parasitic nature and his pleasure in plundering stock and investments is no more than opportunistic at best and reflects the nastiest elements of the "winnners in the free market" when economic cycles appear. (kondratief curve).

Mr Buffett is just taking advantage of ignorance, stupidity and fear that create "irrational behaviour" in times of economic downturns.

He has so much money that he can choose whatvever he wants, and more importantly whenever he wants "money is the king in a collapse of markets".

Waiting until millions loose their investments, funds and pensions is not rocket science.

His parasitic nature and his pleasure in plundering stock and investments is no more than opportunistic at best and refelcts the nastiest elements of the "winnners in the free market" when economic cycles appear. (kondratief curve).

Mr Buffet is just taking advantage of ignorance, stupidity and fear that create "irrational behaviour" in times of economic downturns.